How do deposit replacement schemes work?

Deposit replacement schemes are becoming more mainstream, as tenants look for more digital and cost-effective ways to rent a property. With more and more letting agents and landlords paying attention to different ways of paying the deposit, are you up-to-date with the latest information?

This guide breaks down the pros and cons of deposit replacement schemes for letting agents, landlords, and tenants, so you can see if it's something you or your agency can consider.

Want to know more?:

• Listen: CEO of Reposit, Ben Grech, breaks down the myths of tenant deposits in a half-hour podcast 
• Read: The Tenancy Deposit Scheme lists ten top tips for letting agents to get deposit protection right
• Download: Infosheet - 6 things renters need to know about deposit replacement schemes

This guide covers:

• What is a deposit replacement scheme?
• What are the pros and cons of a deposit replacement scheme for letting agents?
• What are the pros and cons of a deposit replacement scheme for landlords?
• What are the pros and cons of a deposit replacement scheme for tenants?
• Are people using deposit replacement scheme?

How do deposit replacement schemes work?

In a nutshell, a deposit replacement scheme means the tenant pays a non-refundable fee, instead of the traditional deposit of five or six weeks’ rent before moving in. Deposit replacement schemes aim to protect the landlord against any potential breaches of the tenancy agreement. 

Deposit replacement schemes provide the landlord with protection that is either equivalent or more than a traditional deposit, should any costs not be recovered from the tenant.

Tenants who pay for a deposit replacement scheme will still be fully responsible for paying rent and fulfilling the terms of the tenancy agreement.

What are the pros and cons of Deposit Replacement Schemes for letting agents?

Pros

• Letting agents can offer their landlords more protection with a deposit replacement scheme than a traditional capped deposit.
• Deposit replacement schemes offer a reduced total move-in cost for tenants.
• Against can reduce their administration time as they won’t need to lodge new deposits in a client money protection scheme and could even let properties faster.
• Deposit replacement schemes also offer letting agents a new revenue stream by offering a non-refundable fee that is equivalent to or more than a traditional deposit and a possible fully compliant commission.

Cons

• It is necessary as a letting agent to give prospective tenants the option between a deposit replacement scheme and a traditional deposit. Tenants must choose the right solution for them, creating more work for letting agents provide the necessary information so tenants can make an informed decision. 

What are the pros and cons of Deposit Replacement Schemes for landlords?

Pros

• Deposit replacement schemes usually give landlords more weeks of protection against unpaid rent and dilapidations than a traditional tenancy deposit, which is currently capped at five or six weeks’ rent under the Tenant Fees Act.
• Tenants who choose a deposit replacement scheme have increased liability to comply with their tenancy agreement.
• Claims will be initially paid by the Deposit Replacement Scheme, aiming to reduce the claim time compared to a traditional registration scheme.
• Deposit replacement schemes could also help to reduce void periods, as they reduce upfront costs for potential tenants to secure a property.

Cons

• Like letting agents, landlords must give prospective tenants the option between the deposit replacement scheme and a traditional deposit. Necessary information must be given to the tenant, meaning the choice is theirs and not the landlord's.

What are the pros and cons of Deposit Replacement Schemes for tenants?

Pros

• Tenants pay a non-refundable fee instead of a traditional, refundable deposit of five or six weeks’ rent, which means securing a new property has less impact on immediate cash flow.
• Tenants should always be given a choice between a traditional deposit and a deposit replacement service so there is more flexibility for a tenant to decide what scheme is best for them. 

Cons

• Some deposit replacement schemes may charge a yearly renewal fee and others monthly. Depending on agents expected tenure within the property, it is important to be aware that they could sometimes cost more than a traditional deposit.
• Tenants are liable for any unpaid rent or damage to the property (allowing for fair wear and tear). Any costs they are liable for would be calculated at the end of the tenancy.

Are people using deposit replacement schemes?

Traditional deposits are still the preferred method by the majority. However, the number of people choosing deposit replacement services is growing due to the lack of cash flow currently available after the Coronavirus pandemic and the cost of living crisis.

Along with new and innovative products, the growth of this sector comes down to the engagement and education of both landlords and tenants.

“Tenants using a deposit alternative remain fully liable for end of tenancy costs, just like cash deposits.” says Ben Grech, CEO of Reposit. “The difference is that they pay for what they owe at the end of tenancy rather than paying an arbitrary (often excessive) amount of money at the start of tenancy into a non-interest-bearing account.”

Find out more about Deposit Replacement Schemes on our latest podcast with Ben Grech.

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